LESSON EIGHT

PENSION FUND
OBJECTIVES At the end of this lesson, you should: Know the purpose of pension funds; Know how to prepare pension fund accounts.

CONTENTS Read the study text below. Attempt reinforcing questions at the end of the lesson. Compare your solutions with those given in Lesson 9.

STUDY TEXT

INTRODUCTION Pension funds are normally set up to provide pension benefits to employees who have retired. The pension funds receive contributions mainly from employers and employees and the contributionsd are invested. Pension benefits are paid out of the contributions and investment income received. FINAL ACCOUNTS As pension funds are set up for a specific purpose, and not for trading, we do not prepare the normal trading profit and loss account or the balance sheet. The presentation for the final accounts are as per the requirements of IAS 26 ( please see the appendix for other important definition) whereby instead of a trading profit and loss accountwe have the statement of changes in net assets. We also prepare the statement of net assets in the place of a balance sheet. The major emphasis in the past papers has been on the formats so please pay carefull attention to the description. FORMAT FOR FINAL ACCOUNTS

STATEMENT OF CHANGES IN NET ASSETS ABC Pension Fund Statement of Changes in Net assets for the year ended 31 December
Sh. 000 Contributions Received: - From employers: Normal - From employers: Additional - From employees: Normal - From employees: Additional voluntary Transfers in: - Group transfers in from other schemes - Individual transfers from other schemes Investment income: - Income from fixed investment securities - Dividends from equities - Income from unit trusts - Net rents from properties - Interest on cash deposits - Share of profit/loss of trading subsidiary and joint venture Other income: - Claims on term insurance policies X _X X X _X X X _X X X X X X X _X X X Sh. 000

- Sundry income Benefits payable: - Pensions - Commutation of pensions and lumpsum retirement benefits - Death benefits - Payments to and on a/c of leavers: - Refund of contributions - Group transfers out to other schemes - Individual transfers to other schemes Profit on disposal of investments Losses on disposal of investments Changes in values of investments Payments: - Premiums on term insurance policies - Other payments - Admin. Expenses Taxation on income Net change for the year

_X _X X (X) (X) (X) (X) (X) _(X) _(X) X X (X) X _X X (X) (X) (X) (X) X (X) X

STATEMENT OF NET ASSETS ABC Pension fund Statement of Net assets as at 31December
Sh. 000 Investment Assets - Fixed interest securities: Government : Other - Equity investments - Unit trust investments - Property: Freehold : Leasehold Cash deposits Trading subsidiary cost & joint ventures Insurance policies Other investments Debtors on investment transactions X X X X X X X X X X X X X Sh. 000

- Creditors for investment transactions Fixed Assets - All assets held primarily for reasons other than investment potential Long term borrowings (Normally to enhance funds returns) Current Assets Contributions due from employer Other current assets Current liabilities Unpaid benefits Other current liabilities Net Assets Accumulated fund as at beginning of year Net new money invested as per revenue a/c (including changes in market value of interests) Accumulated fund as at year end Example

(X) X X X X (X) X X X X (X) (X) (X) X XX X X XX

The following is the trial balance of Civil Servants Pension Fund as at 31 March 2005: Sh 000 Accumulated fund as at 1 April 2004 Land and buildings in the Central business district Pensions Income from fixed return securities 11% Treasury Stock Freehold Property (Developed with rental income housing units) Employers normal contribution Employees additional voluntary contributions Administration expenses Claims received on tem insurance policies Premiums paid on term insurance policies Term insurance policies Employers additional contributions Employers normal contributions Unpaid benefits Group transfers in from other schemes Individual transfers out to other schemes 2,000 390 580 400 2,200 980 200 150 21 49 400 25 300 30 75 5 Sh 000 3,245

Debtors on investment transactions Commutation of pensions and lump sum retirement benefits Dividends received from equity investments 20,000 ordinary shares in Flamingo Airways Individual transfers in from other schemes Income from unit trusts Rental income from property Group transfers out to other schemes Cash and demand deposits Tax paid on fund income Ksh.250, 000 loan stock in KVM Death benefits paid Creditors for investment transactions Refund of contributions Investment in unit trusts Loan from HFCK to develop Property Contributions due within 30 days Shares in Moyalematt Ltd 2.00

16 15 400 200 14 70 45 40 35 460 200 15 22 28 350 1,000 56 7,009 2 7,009

Notes: The fund owned 12,000 shares in Moyalematt, which were initially purchased for Shs.14, 000. These have been disposed of during the year. The only entries made in the books were in a debtor account and investment account since the shares are yet to be paid for. The trustees felt the need to reflect the following market prices in the financial statements: Loan stock in KVM Market price index 84.00 Shares in Flamingo Airways -Sh.9.75 per share. Required: (a) Statement of changes in net assets for the year to 31 October 2005. (b) Statement of net assets as at 31 October 2005. (20 Marks) Note: This should be in compliance with IAS 26 Accounting and reporting by retirement benefit plans. Solution Civil Servants Pension Fund Statement of changes in net assets for the year to 31 October 2005 Sh. 000 Sh. 000 Contributions received: From employees: Normal 980 From employers: Additional 25 1005 From employees: Normal 300

From employers: Additional voluntary 200 Transfers in: Group transfers in from other schemes 75 Individual transfers in from other Schemes 14 Investment income: Income from fixed interest securities Dividends from equities Income from unit trusts Rents from properties 580 400 70 45 2710 Benefits payable: Pensions (390) Commutation of pensions and lump sum retirement benefits (15) Death benefits (15) Payments to and on a/c of leavers: Refund of contributions (28) Group transfers out to other schemes (40) Individual transfers out to other schemes Profit on investment disposals Changes in market values of investments: Loan stock in KVM 10 Shares in Flamingo Airways 2 (5) (49) (199) 2025 Taxation on income Net change for the year Civil Servants Pension Fund Statement of Net Assets as at 31 October 2005 Sh. 000 Investment Assets Fixed interest securities: 11% T.Stock : KVM loan stock Equity investments: Flamingo Airways shares Unit trust investments Property: Freehold 400 210 610

500

89

1095 21

Other income: Claim on term insurance policies

(5) (493) 2217

Payments: Premiums on term insurance policies : Admin expenses (150)

(460) 1565

Sh. 000

195 350 2200

Cash and demand deposits Insurance policies Debtors on investment transactions Creditors for investment transactions

35 400 16 ( 22) (6) 3784

Fixed Assets Leasehold property in Nairobi CBD 5784 Long term borrowings HFCK Loan Current Assets: Contributions due within 30 days Current Liabilities Unpaid benefits Net Assets Accumulated Fund at 1 Nov.2000 Net new money invested per revenue a/c including changes in market value of investments Accumulated Fund at 31 October 2001 Example

2000

(1000) 4784 56 (30) 26 4810 3245 1565 4810

(a) What meetings of creditors must be held and for what purpose in the course of a creditors voluntary winding up? (7 marks) (b) The following trial balance was extracted from the accounting records of the XYZ Retirement Benefits Scheme for the year ended 30 September 2000. Sh. 000 Accumulated fund as at 1 October 1999 Accrued expensed Administrative expenses Cash and demand deposits Change in market value of investments Commutation and lump sum retirement benefits Contributions due within 30 days Employer normal contributions Individual transfers in from other 2,840 23,460 22,640 4,820 4,940 36,480 3,150 1,860 47,400 132,320 Sh. 000 461,560 240

schemes Individual transfers out to other schemes Investment income Immovable property Kenya Government securities Members nominal contributions Members additional voluntary contributions Pensions Quoted equity investments Unpaid benefits Unquoted equity investments Required:

263,605 18,240 4,560 7,640 87,835 320 19,990 571,950 571,950

The statement of Changes in Net Assets (the Fund Account) for the year ended 30 September 2000 and a statement of Net Assets as at 30 September 2000, in accordance with International Accounting Standard 26 (Accounting and reporting by Retired Benefit Plans) Hints: The XYZ Retirement Benefits Schemes accounting policies state that the reconciliation of the accumulated fund for the year is included in Statement of Net Assets and administrative expenses are included as the final item in the Statement of Charges in Net Assets. In all other respects, the format used is in conformity with that laid down in the Retirement Benefits Regulations in Retirement Benefits Act. (11 marks) (Total: 18 marks) Solution (a) The first meeting of creditors voluntary winding up should be held on the same day when the members have passed a resolution to wind up the company or on the day after. In this meeting the creditors shall: Appoint amongst them a chairman Join the members to appoint a liquidator Join the members to appoint a committee of inspection of up to 5

people.

The directors must present to the members the statement of affairs and the list of creditors. The creditor may also terminate the liquidator earlier appointed by the members When the liquidation commenced the creditors shall meet one year after commencement to review the progress and attend to any pending matters. Such meetings are called by the liquidator.

If the liquidation is not complete after one year the creditors shall meet after lapse of one year for all years in which the liquidation is incomplete. When the liquidation is complete the liquidator must call a final meeting and lay before the company and creditors the accounts of winding up.

(b)

XYZ Retirements benefit scheme. Statement of changes in net assets as at 30 Sept. 2000 Sh. 000 Sh. 000 Contributions received: - From employers: Normal 36,480 - From employees: Normal 18,240 - From employees: Additional voluntary 4,560 22,800 Transfers in: - Individual transfers in from other schemes 3,150 Investment income: - Sundry investment income 47,400 109,830 Benefits payable: - Pensions (7,640) - Commutations and lumpsum retirement (4,820) benefits Payments to and a/c of leavers: - Individual transfers out to other schemes (1,860) (14,320) 95,510 Changes in market values of investments (22,640) 72,870 Payments: - Admin expenses (2,840) Net change for the year 70,030 XYZ Retirements benefit scheme Balance sheet (statement of Net Assets) as at 30 Sept. 2000 Sh. Sh. 000 000 Investment Assets: Fixed interest securities: Kenya Govt 263,60 5 Equity investments: quoted 87,835 : unquoted 19,990 107,82 5 Cash and demand deposits 23,46 0

394,89 0 Fixed assets Immovable property 132,32 0 527,21 0 4,940 (240) (320) (560) 4,380 531,59 0 461,56 0 70,03 0 531,59 0

Current Assets Contributions due within 30 days Current liabilities Accrued expenses Unpaid benefits Net Assets Accumulated fund at 1 October 1999 Net new money invested as per statement of cha. In NA Accumulated fund at 30 Sept. 2000

REINFORCING QUESTIONS
(a) Explain the following terms as used in bankruptcy acts: (i) (ii) (b) Voluntary transfers Doctrine of reputed ownership (2 marks) (3 marks)

Wafanyakazi Retirement Benefit Scheme has provided you with the following extract of the trial balance for the year ended 31 October 2002: Sh.00 Sh.000 0 461,560 240 2,840 23,460 22,640 4,820 4,940 36,480 18,240 3,150 1,860

Accumulated fund as at 1 November 2001 Accrued expenses Administration expenses Cash and demand deposits Change in market value of investments Lumpsum retirement benefits Contributions due in 30 days Normal contributions by: Employer Employees

Transfer in from other schemes Individual transfers out to other schemes Investment income Immovable property Government securities (longterm) Members voluntary contributions Pension Equity investments: Quoted Unquoted Unpaid benefits

47,400 132,32 0 263,60 5 7,640 87,835 19,900 ______ 4,560

320

571,95 0 Required: (i) 2002. (ii) marks)

571,950

Statement of changes in net assets for the year ended 31 October (8 marks) Statement of net assets as at 31 October 2002. (Total: 20 marks) (7